If you intend entering into a joint venture, it is wise to put in place a joint venture agreement at inception to protect your investment and clarify roles. Each joint venture is unique and joint venture agreements must be tailored to your particular circumstances.
Our team will highlight common issues in collaborative business agreements, provide you with advice in relation to the most appropriate structure and prepare all documentation required for your joint venture.
What is a joint venture?
A joint venture is an arrangement between different parties which provides that those parties contribute their respective property and/or resources for the purpose of a single undertaking for mutual commercial gain.
What are the types of joint ventures?
A joint venture may be established in the form of an incorporated joint venture or an unincorporated joint venture.
Incorporated Joint Ventures
An incorporated joint venture arises where the parties incorporate a company (“JV Company”) for the purpose of carrying out the joint venture activity. Generally, each joint venture party will be a shareholder of the JV Company, and will have the ability to appoint a director to the board of the JV Company.
The respective rights and obligations of the joint venture parties in an incorporated joint venture will be set out in a Shareholders Agreement.
Unincorporated Joint Ventures
In an unincorporated joint venture, the parties will personally perform aspects of the joint venture activity (including, where applicable, entering into an agreement with the client of the joint venture) rather than through a joint venture vehicle.
The parties to an unincorporated joint venture will record their respective rights, obligations and liabilities in a joint venture agreement.
For the purposes of the subsequent paragraphs, a reference to a “joint venture” is intended to mean an unincorporated joint venture.
Characteristics of a joint venture
A joint venture will commonly have the following characteristics:
(a) the parties will exercise joint control of the joint venture;
(b) the parties contribute to the joint venture in defined proportions;
(c) the parties’ respective entitlements and liabilities will be determined by reference to those proportions; and
(d) the parties have a joint interest in the performance of the joint venture activity.
How is an unincorporated joint venture managed?
The joint venture parties will constitute a committee for the purpose of managing the joint venture. Each joint venture party will generally be entitled to appoint an authorised officer on the committee. The joint venture committee will meet at regular intervals agreed by the parties.
The role of a joint venture committee may include:
(a) considering and agreeing all matters and documentation relevant to the joint venture;
(b) considering and agreeing on the timeline for the performance of the joint venture activity;
(c) liaising with a customer (where applicable) in respect of the performance of the joint venture activity;
(d) managing payments to the joint venture parties; and
(e) dealing with claims or actions against the joint venture.
How is liability of a joint venture party determined?
The liability of a joint venture party for any cost, expense or claim arising in connection with the joint venture activity, will typically correspond to the level of contribution made by that party to the joint venture. This will be clearly defined in the joint venture agreement between the parties.
Where the joint venture parties enter into a contract with a third party (for example, a construction contract with the principal), the parties may be required to assume liability to that party jointly and severally. In that instance, notwithstanding that a joint venture party has set interest (for example, 20%), that party may be liable for the full amount claimed by the third party.
To protect joint venture parties from that situation, a joint venture agreement will include cross-indemnities between the parties. Pursuant to those indemnities, the joint venture parties agree to indemnify the other parties so that the indemnified parties’ liabilities are limited to the relevant proportion.
Distribution of profits
A joint venture agreement will set out a clear method for calculating profits of the joint venture, and for the distribution of such profits.
To achieve this, the joint venture agreement must clearly identify which costs incurred by the parties constitute joint venture costs, and which costs must be assumed solely by the party who has incurred them. Joint venture costs may include:
(a) the cost of borrowing funds from a lender to finance the joint venture;
(b) wages and other contributions paid to workers regarding the services and labour supplied to the joint venture;
(c) the cost of all sub-contracts relating to the joint venture;
(d) the cost of equipment, materials and supplies procured by a party in connection with the joint venture; and
(e) the cost of obtaining all approvals.
Any monies received by the joint venture will firstly be applied towards the payment of unpaid joint venture costs. Where the parties have made a capital contribution, those contributions will generally be reimbursed before profits can be distributed.
Profits of the joint venture will be distributed in accordance with the determined proportions specified in the joint venture agreement. As for liability, a joint venture party’s entitlement to profits will typically correspond to the level of contribution made by that party to the joint venture.
When may a joint venture be appropriate?
A joint venture may be appropriate in the following circumstances:
(a) Party A is licensed to perform “A Services”, and Party B is licensed to perform “B Services”. Party C wishes to engage a contractor to undertake a project, which requires the performance of A Services and the B Services. Party A and Party B form a joint venture to submit a tender for the project, and if the tender is successful, undertake the project;
(b) Party A and Party B are both manufacturers of competing products. Party A and Party B wish to undertake research for the purpose of developing their respective product, but do not have the resources to do so individually. Party A and Party B agree to form a joint venture to combine resources and knowledge to undertake the product research.
How we can help
Before embarking on a joint venture, you should always seek legal advice to determine whether it is appropriate for your circumstances.
At Coulter Legal, our lawyers are able to advise on whether a joint venture is the most appropriate collaborative business agreement for your activities and provide advice as to alternate business structures and agreements, where appropriate. Our experienced Corporate & Commercial team can draft joint venture agreements tailored to your activities and provide advice on any documentation in relation to your joint venture.